Should You Choose an Income Based Repayment Plan?

Kat Tretina
Income-Based Repayment
Income-Based Repayment

If you have student loan debt, you know how expensive those payments can be. In fact, the average student loan payment for someone in their 20s is $351. When your loan payment eats up such a significant portion of your budget, it can be hard to make ends meet.

If you have federal loans, you have some options to reduce your payments. There are alternative payment plans available, such as Income-Based Repayment, that can make your payments more affordable. However, income-based payments aren’t for everyone. Here’s what you need to know about Income-Based Repayment.

What is Income-Based Repayment?

Income-Based Repayment is one of four income-driven repayment (IDR) plans available for federal student loans. If you’re having trouble keeping up with your loan payments, it’s a smart way to reduce your monthly bill. There are five keys things you should know before signing up:

  • Your loan term is extended: If you’re a new borrower as of July 1, 2014, your repayment term will be extended to 20 years. Your monthly payment is generally capped at 10 percent of your discretionary income, but your payment will never be higher than it would be under a Standard Repayment Plan.
  • You may pay more in interest: With an Income-Based Repayment Plan, you may pay more in interest over time than you would under a Standard Repayment Plan. However, you may find that tradeoff is worth it to get a more affordable monthly payment.
  • Your payments can change: With an Income-Based Repayment Plan, your monthly payment can change. Each year, you will need to recertify your income and family size, and the loan servicer will use that information to calculate your payment. For example, if you have a child or you take a pay cut, your monthly payment would decrease.
  • A portion of your loans may be forgiven: If you qualify for Income-Based Repayment, make payments for 20 years, and still have a balance at the end of your repayment term, the remaining loan balance is forgiven. However, the discharged balance is taxable as income.
  • You can use Income-Based Repayment with PSLF: You can also take advantage of Income-Based Repayment if you plan on pursuing Public Service Loan Forgiveness (PSLF). With this approach, your loans are forgiven after you make 120 qualifying payments while working for a non-profit organization or government agency. In the case of PSLF, the discharged loan balance is not taxable.

Who is eligible for Income-Based Repayment?

Borrowers with the following loan types are eligible for Income-Based Repayment:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate or professional students
  • Direct Consolidation Loans (not including parent loans)
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • Federal Perkins Loans (must consolidate first)

To qualify for this payment plan, your payment under Income-Based Repayment must be less than it would be under a 10-year Standard Repayment Plan.

You can apply for Income-Based Repayment online.

Income-Based Repayment vs. other payment plans

While Income-Based Repayment can be helpful, it’s not your only option. There are three other plans to consider:

  1. Income-Contingent Repayment: Your loan term is extended to 25 years, and your monthly payment is the lesser of 20 percent of your discretionary income or what you would pay on a fixed payment plan with a 12-year term.
  2. Pay As You Earn: Your monthly payment is generally 10 percent of your discretionary income, and your repayment term is extended to 20 years.
  3. Revised Pay As You Earn: If your loans were for an undergraduate degree, your loan term is extended to 20 years. If your loans were for a professional or graduate degree, the loan term is 25 years. Your monthly payment is then capped at 10 percent of your discretionary income.

Is Income-Based Repayment right for you?

When deciding which IDR plan to choose, follow these three steps:

1. Consider your loan type

Not all federal student loans qualify for all four IDR plans. For example, if you have FFEL Plus Loans for graduate students, FFEL Consolidation Loans, Subsidized Federal Stafford Loans, or Unsubsidized Federal Stafford Loans, Income-Based Repayment is the only IDR plan you’re eligible for unless you consolidate your loans first.

If you have parent student loans, such as PLUS Loans, you aren’t eligible for Income-Based Repayment. However, you can qualify for Income-Contingent Repayment if you consolidate your loans first.

2. Do the math

Once you’ve determined which IDR plans your loans are eligible for, you can compare your total repayment amounts to identify the best option. You can use the federal Repayment Estimator to calculate your monthly payments based on loan balance, income, family size, and location.

For example, let’s say you had $30,000 in student loans at 7% interest, and your income will increase by 5% every year. Under a Standard Repayment Plan with a 10-year repayment term, your monthly payments would be $348 and you would repay a total of $41,799.

If you decided to sign up for an IDR plan, your payment could drop significantly. If you were married, lived in Florida, and had an annual income of $35,000, you’d pay the following under each plan:

  Income-Based Repayment Income-Contingent Repayment Pay As You Earn Revised Pay As You Earn
Repayment Period 240 Months 194 Months 240 Months 276 Months
First Monthly Payment $80 $239 $80 $80
Last Monthly Payment $348 $291 $348 $498
Total Amount Paid $50,589 $51,073 $50,589 $68,376
Projected Loan Forgiveness Amount $20,058 $0 $20,058 $0

With this scenario, you would get the lowest monthly payments to start with Income-Based Repayment or Pay As You Earn. You would also repay the least in total with these two IDR plans. However, the remaining balance — $20,058 — would be discharged and would be subject to income taxes.

3. Choose the plan that’s the best fit

After using the Repayment Estimator, look at the plan which not only gives you the lowest payment, but will help you pay the least overall. If you do the math and think about your career and family plans, you can choose the IDR plan that fits best for you.

Repaying your student loans

If you’re having trouble affording your monthly student loan payments, signing up for an IDR plan like Income-Based Repayment can dramatically reduce your monthly bill and give you more breathing room in your budget.

Looking for other ways to reduce your monthly payment? Consider alternative payment plans and student loan refinancing to lower your payment.

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